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Why commodity exporters may get a tailwind

Conventional wisdom suggests commodity exporters will take price declines on the chin, but Morgan Stanley expects they’ll benefit most.

It’s all about curing the Dutch Disease, Morgan Stanley said in a note last week, referring to the negative economic impact of increasing natural resources investment at the expense of other sectors.

“If left uncured, the net effect is usually a decline in productivity that tends to hurt growth over longer periods,” the bank said.

“Commodity exporters face a difficult transition, some a recession, and even after that, a few could lapse back into mediocre growth and low productivity,” it said.

But it added, “commodity price falls of this magnitude can completely change the structure of commodity-exporting economies, while no such dramatic transformation occurs among commodity importers.”

Readjustments

Resources prices have taken a beating nearly across the board. Oil prices are down more than 60 percent from their mid-2014 peaks, while copper last week touched its lowest levels since mid-2009. Ramped up production has caused supply gluts of many commodities, while many agricultural products are seeing larger-than-expected harvests.

In addition, the U.S. dollar has strengthened, weighing on the dollar-denominated cost of many commodities.

Morgan Stanley believes the drop in commodity prices will rebalance the exporters’ economies better than any policy changes.

“Since macro-adjustment leads to a reduction in expenditure across all sectors, including the beleaguered manufacturing sector, it creates a greater downside risk for growth,” it said. “Commodity price declines can do a much better job” of making the manufacturing sector competitive again as labor costs soften, currencies weaken and commodity inputs become cheaper, it said.

Winners and losers

The bank tips Indonesia, Malaysia and Brazil as the commodity exporters most likely to benefit as they already have a nascent manufacturing sector that can gain from improved competitiveness. Russia’s manufacturing base has eroded and it faces additional headwinds from the dominance of state-owned enterprises as well as sanctions, but the country still has human capital and infrastructure to develop the sector, it said.

However, Chile, Peru and most of the Middle East could face hurdles as they’ve never had much of a manufacturing base, the bank said.

Others also expect some commodity producers to benefit from lower resources prices.

“Indonesia’s exports are too commodity-dependent (32 percent of exports – metal, crude palm oil and coal),” and it faces a current account deficit largely due to oil-product imports, CIMB said in a note last week.

It expects the country will pursue “import substitution” policies to curb imports of items such as consumer goods, noting “ultra-luxuries,” such as sports cars already face 125 percent import tariffs.

“The list may widen to more mundane electronics (e.g. cellular phones, which are chiefly imported) while at the same time giving incentives to boost domestic production,” CIMB said.
Source: CNBC